How to Own Your Real Estate

How to Own Your Real Estate

How to own your real estate is a question many people ask. You see, real estate encompasses not only one’s primary residence but also other real estate such as a vacation home or a rental property. The ideal form of ownership varies depending on the type of real estate you own. Below, we take a look at the different types of real estate and offer advice about the best form of ownership for each.

Primary Residence

Because your primary residence receives special tax treatment, you should carefully consider how your home is owned.

Tenancy by the Entirety

Most married couples hold their personal home as tenants by the entirety. In North Carolina, tenancy by the entirety offers married couples creditor protection in most instances. Tenancy by the entirety ownership protects the property from creditors of one spouse. However, federal tax liens are an exception.

If you own property as tenancy by the entirety with our spouse, you both have equal rights in the property. When one spouse dies, the property ownership automatically transfers to the surviving spouse. You do not need to issue another deed to the surviving spouse.

Only married couples can hold title as tenants by the entirety. The couple must be married at the time the deed is recorded. One spouse cannot sever the property right. Both must agree.

If the couple divorces, any tenancy by the entirety property will automatically resort to a tenant in common ownership interest. Each party now has a one-half interest in the property.

Tenants in Common

When you purchase property with another person as a tenant in common, you each own an undivided fractional interest in the property. Each owner has the right to use and possess the property. Their ownership is based on the percentage of their tenant in common interest.

Peter, Paul and Mary are good friends who are single. They decide to buy a house together. The deed lists all three of them as tenants in common. What does this mean? This means that Peter, Paul and Mary each have a one-third ownership interest in the house. Each of them has the right to sell, gift or devise his one-third interest in the home. He does not need permission from the others to do so. When he dies, his one-third share will be distributed to his heirs. This also means that no owner can deny the other owners access to the property.

If the parties cannot agree on ownership issues, any owner may petition the court for a partition action. In a partition action, a court decides ownership of the property. The court may order one tenant in common to buy out the other tenant in common. Or, the court may order the sale of the property.

Speaking of sale of the property whether by petition or voluntary, all owners receive their share of the sale proceeds. So, in Peter, Paul and Mary’s case, each would receive one-third of the sale proceeds after selling their home.

Joint Tenants

A third option of property ownership is joint tenants with right of survivorship. Let’s say Peter, Paul and Mary decide to instead take title to their home as joint tenants with right of survivorship. If Peter then dies, his interest in the property automatically passes to Paul and Mary.

However, any owner has the right to convey their ownership interest during their lifetime. A few years have passed and Paul meets Molly. He decides to marry Molly and move in with her. So, he sells his interest in the home to another friend, Ringo. Now, Peter, Mary and Ringo are joint tenants but without the right of survivorship. They each own a separate one-third interest in the property. Now if one of them dies, his one-third interest will pass to his heirs.

Vacation Homes

For some families, their vacation home has not only high monetary value but also significant emotional value. Ownership of a vacation home by a trust or limited liability company (LLC) can be advantageous because it addresses two main priorities: ease of transfer to the next generation and asset protection.

An additional benefit of having an LLC own your vacation home is that it provides limited liability from outside claims. If a judgment is entered against the LLC, the creditor is limited to the accounts or property owned by the LLC to satisfy the creditor’s claims and cannot look to your personal accounts or property or those of the other members. Also, if a judgment is entered against you or another member for a claim unrelated to the LLC, it will be harder for a creditor to force a sale of the vacation home. This can be incredibly helpful if you wish to pass the vacation home on to the next generation without worrying about the individual financial situation of each new member.

An additional benefit of having an LLC own your vacation home is that it provides limited liability from outside claims. If a judgment is entered against the LLC, the creditor is limited to the accounts or property owned by the LLC to satisfy the creditor’s claims and cannot look to your personal accounts or property or those of the other members. Also, if a judgment is entered against you or another member for a claim unrelated to the LLC, it will be harder for a creditor to force a sale of the vacation home. This can be incredibly helpful if you wish to pass the vacation home on to the next generation without worrying about the individual financial situation of each new member.

Rental Property

Because rental property is an income stream rather than a residence, asset protection is usually the primary concern. As a landlord and owner of rental property, you face a higher probability of lawsuits arising in connection with the property because the occupants can change over time. Transferring ownership of the rental property to an LLC is a great option. If a renter gets injured on the property, sues the LLC that owns the property, and obtains a judgment that exceeds any property insurance you have, the renter can seek satisfaction of any claims only from the accounts and property owned by the LLC, not from your personal accounts and property or those of any other owners of the LLC.

Because rental property is an income stream rather than a residence, asset protection is usually the primary concern. As a landlord and owner of rental property, you face a higher probability of lawsuits arising in connection with the property because the occupants can change over time. Transferring ownership of the rental property to an LLC is a great option. If a renter gets injured on the property, sues the LLC that owns the property, and obtains a judgment that exceeds any property insurance you have, the renter can seek satisfaction of any claims only from the accounts and property owned by the LLC, not from your personal accounts and property or those of any other owners of the LLC.

Conclusion

When you are buying real estate, you have a lot of ownership considerations you need to make. You should consult with a real estate attorney to discuss the best ownership option for you and your needs.